CPI Bias and Real Living Standards in Russia During the Transition

42 Pages Posted: 8 Jun 2004

See all articles by John Gibson

John Gibson

University of Waikato; Motu Economic and Public Policy Research

Steven Stillman

Free University of Bozen-Bolzano; IZA Institute of Labor Economics

Trinh Le

Motu Economic and Public Policy Research Trust

Date Written: May 2004

Abstract

The economies of the former Soviet Bloc experienced large declines in output during the decade of transition which began with the collapse of the Soviet Union in 1991. Yet there are many reasons to believe that measured output and official deflators provide a poor proxy for the change in real living standards in transition economies. This paper uses the Engel curve methodology recently developed by Hamilton (2001) and Costa (2001) to examine changes in real living standards in Russia during the transition period and to provide an estimate of how much the official Russian CPI has overstated consumer inflation. We also examine changes in consumer durables, home production, and subjective well-being to further evaluate changes in living standards. Our findings indicate that CPI bias has caused a substantial understatement of the growth performance of the Russian economy during the transition. Even just allowing household final consumption to be deflated with bias, we find that the level of real per capita GDP in 2001 may be understated by up to thirty percent compared with using a bias-corrected deflator. Our analysis of consumer durables, home production, and subjective well-being supports the conclusion that the decline in living standards has been substantially less than what is inferred by looking at official statistics on real output.

Keywords: CPI bias, Living standards, Measurement error, Prices, Russia, Transition

JEL Classification: C43, E31, O12, P36

Suggested Citation

Gibson, John and Stillman, Steven and Le, Trinh, CPI Bias and Real Living Standards in Russia During the Transition (May 2004). Available at SSRN: https://ssrn.com/abstract=555786 or http://dx.doi.org/10.2139/ssrn.555786

John Gibson (Contact Author)

University of Waikato ( email )

Te Raupapa
Private Bag 3105
Hamilton, 3240
New Zealand

Motu Economic and Public Policy Research

19 Milne Terrace
Island Bay
Wellington, 6002
New Zealand

Steven Stillman

Free University of Bozen-Bolzano ( email )

Via Sernesi 1
39100 Bozen-Bolzano (BZ), Bozen 39100
Italy

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Trinh Le

Motu Economic and Public Policy Research Trust ( email )

Level 1, 93 Cuba Street
P.O. Box 24390
Wellington, 6142
New Zealand

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